5 - How Do We Deal with Uncertainty and Ambiguity?

Summary

This chapter explores how people characterize and cope with the cognitive challenges they face when they perceive uncertainty. Economists normally model how people think about uncertainty in terms of probability distributions assigned to rival outcomes on the dimension in question, but people commonly speak with a focus on whether outcomes are “probable” or merely “possible.” The chapter therefore explores differences between subjective probability concepts and Shackle’s possibility-based “potential surprise” view of uncertainty and his theory of focus outcomes. We also examine probability-assigning heuristics and inductive and deductive philosophies for assigning how probable or possible events might be. We then consider rule-based method by which people deal with “fundamental uncertainty,” where probabilities cannot be assigned and a leap in the dark must be made. Finally, the chapter focuses on how people deal with dread that specific problematic events may occur, including decisions to bail out of commitments due to short-run loss of nerve, leading to losses of major long-term benefits. This discussion includes analysis of how terrorism works despite low odds of being a victim.